Revised Code of Ethics: Key areas of focus for auditors

Stephen Chan

An overview of the Institute’s revised Code of Ethics

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Stephen Chan


In November 2018, the Institute issued the revamped and restructured Code of Ethics for Professional Accountants (2018 code). This is the local adoption of the International Code of Ethics for Professional Accountants (including International Independence Standards) produced by the International Ethics Standards Board for Accountants and published by the International Federation of Accountants (IFAC) in April 2018. The 2018 code is effective from 15 June 2019.

Fundamental principles and conceptual framework

The 2018 code retains the fundamental principles of professional ethics – integrity, objectivity, professional competence and due care, confidentiality and professional behaviour, as well as the categories of threats to them – self-review, self-interest, advocacy, familiarity and intimidation threats.

The overarching requirements for CPAs to apply the conceptual framework to comply with the fundamental principles and where applicable, be independent, are unchanged, but the 2018 code has enhanced the conceptual framework with extensive revisions to “safeguards” which are better aligned to “threats.” For auditors, there are five key changes to the code to note.

New separate independence section

The 2018 code consistently reminds CPAs to be independent when performing audits, reviews, or other assurance services. The independence rules always have been part of the code, but they have now been moved to a new section, “Independence Standards,” further divided into two subsections: independence when performing financial statement audits and reviews (Part 4A); and independence when performing all other assurance services (Part 4B). There are also new and improved provisions helping CPAs apply the conceptual framework when dealing with threats to independence in various contexts.

The 2018 code also establishes a new description of recruiting services and clarifies the types of recruiting services that CPA firms and network firms are prohibited from providing to their audit clients. One of those prohibitions relates to searching for, or seeking out, candidates and undertaking reference checks of prospective candidates for directors or officers of the entity, and senior management in a position to exert significant influence over the affairs of clients which is now extended to all entities.

Strengthened independence requirements

The Institute has previously adopted IFAC’s enhanced code on independence provisions relating to long association of audit personnel. This contains a number of substantive improvements, including a strengthened partner rotation regime for audits of public interest entities. The 2018 code has improved these long association provisions with clearer requirements and safeguards and fortified provisions. However, these revisions do not change the substance of the long association provisions.

The new cooling-off period is five years for engagement partners, three years for engagement quality control reviewers, and two years for all other key audit partners.

Strengthened provisions relating to offering and accepting of inducements

The enhanced inducement provisions also clarify the meaning of inducements, and introduce a more robust and comprehensive framework, which clearly delineates the boundaries of acceptable inducements and guides the behaviours of CPAs in all situations involving inducements.

The 2018 code introduces a new intent test that prohibits the offering or accepting of inducements where there is actual or perceived intent to improperly influence the behaviour of the recipient or of another individual.

New materials to emphasize the importance of understanding facts and circumstances when exercising professional judgement

The 2018 code highlights the importance of professional judgement in identifying, evaluating and addressing threats in order to make informed decisions, and to obtain an understanding of specific facts and circumstances, including the nature and scope of the professional activity or service; and the interest and relationship involved. New materials have been added to the 2018 code to help CPAs better understand what to consider in exercising professional judgement. For example, the 2018 code explains that among other matters, exercising professional judgement involves a consideration of whether:

  • There is reason to be concerned that potentially relevant information might be missing from the facts and circumstances known to the CPA;
  • There is an inconsistency between the known facts and circumstances and the CPA’s expectations;
  • The CPA’s expertise and experience are sufficient to reach a conclusion;
  • There is a need to consult with others with relevant expertise or experience;
  • The information provides a reasonable basis on which to reach a conclusion;
  • The CPA’s own preconception or bias might be affecting the CPA’s exercise of professional judgement; and
  • There might be other reasonable conclusions that could be reached from the available information.

The new materials relating to professional judgement are intended to make more explicit the procedures already included in the old code. It is expected that CPAs will be able to exercise professional judgement in a more consistent manner.

New materials to explain how compliance with the fundamental principles supports the exercise of professional scepticism

The 2018 code provides new materials on exercising professional scepticism, which applies only in the context of performing audits of financial statements and illustrates how a CPA’s compliance with the fundamental principles supports the exercise of professional scepticism.

The views expressed in this article represent the personal views of the author only, and are high-level summary of the requirements for reference and discussion purposes only. They are not meant or intended to be taken as professional or legal advice.

This article is contributed by Stephen Chan, Director and Head of Risk, at BDO Limited.

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November 2019 issue
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